AngloGold Ashanti Ltd. (ANG)’s debt deserves to be promoted from junk at Standard & Poor’s after the company cut costs, boosted production and settled a strike, Chief Executive Officer Srinivasan Venkatakrishnan said.
Bond markets suggest he’s right. Yields on AngloGold’s $700 million of bonds due in April 2020 have declined 279 basis points to 6.28 percent since Aug. 7, when it announced a plan to slash costs. That’s near a four-month low of 6.18 percent reached on Nov. 7 and at levels last seen when the debt was rated investment grade by S&P. Gold Fields Ltd. (GFI)’s $1 billion of bonds due October 2020 have the same credit rating and a yield that’s 135 basis points higher at 7.63 percent.
S&P cut AngloGold’s credit rating one step to BB+ from BBB-on July 17, saying the 23 percent decline in the price of the metal this year will crimp cash flow given the company’s planned capital expenditure. AngloGold has since announced plans to slash capital and corporate spending and cut jobs, contributing to an 11 percent drop in production costs to $1,155 an ounce in the third quarter, 13 percent below the price of gold in the period.
“Taking all of that into account, certainly we’d expect to see some improvement” in the credit rating, Venkatakrishnan said. “The debt in the secondary market is already trading like investment-grade debt.”
A month after being downgraded, AngloGold announced plans to save almost $1 billion from corporate, exploration and ongoing costs. The company also said it would reduce capital spending after two new mines started producing gold ahead of schedule in September.
“They were concerned we’d deliver the two projects on time and on budget,” Venkatakrishnan said by phone on Nov. 6. “We’ve ticked that box. They were concerned about wage increases. We’ve ticked that box. They were concerned about production improvements. We’ve ticked that box. They were concerned about our all-in costs. We’ve started making inroads into that.”
S&P doesn’t comment on future ratings changes, said London-based Elad Jelasko, the primary credit analyst who downgraded AngloGold in July. Nevertheless, he is unmoved by the company’s recent changes in strategy.
“We’ve seen nothing that’s going to materially change our assumptions for $1.8 billion of Ebitda in 2014,” he said by phone yesterday. “Our forecast already factored some elements of cost-cutting, as well as wage negotiations and output from the new mines of Tropicana and Kibali. The gold price will continue to be the main driver.”
Ebitda refers to earnings before interest, tax, depreciation and amortization. Gold dropped 0.1 percent to $1,281.09 an ounce at 10:16 a.m. in Johannesburg.
The rand declined 0.5 percent to 10.4114 per dollar, extending the drop this year to 19 percent, the worst among 16 major currencies tracked by Bloomberg. Yields on South Africa’s $2 billion of bonds due in March 2020 climbed 167 basis points, or 1.67 percentage points, in 2013 to 4.31 percent.
AngloGold, with other South African producers including Gold Fields, agreed to raise entry-level underground workers’ wages by 8 percent in September, bringing an end to a two-day strike. The National Union of Mineworkers, which represents two-thirds of South African gold mining employees, had asked for a 60 percent increase.
“The settlement was not materially better than our expectations,” Jelasko said. “We need to be cautious here and consider whether they are realistic or not and how much time it will take to unlock” the benefits of cost cuts, he said.
Credit rating company Moody’s Investors Service Inc. is more impressed with AngloGold’s strategic plans. Moody’s has a Baa3 rating, the lowest investment grade, on the gold producer’s debt, with a negative outlook.
“The key focus areas that we are tracking are trending in the right direction,” Dion Bate, a Johannesburg-based credit analyst at Moody’s, which doesn’t comment on future rating or outlook changes, said by phone yesterday. “Wage negotiations, cost cutting and the strengthening of the liquidity profile are largely positive developments. But we must see these trends bedded down.”
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